All URL rewrite rules are under "Core/Web/HttpModules/UrlRewrite.cs". It is in the compiled BlogEngine.Core.Dll so you need to open source version in VS to edit and recompile if needed. I doubted though it is something in there you need to change, most likely
it is IIS issue. Like virtual directory not setup or sub-domain rerouted by host.

This problem is very annoying and seems nobody know how to fix it. Shouldn't be there an option in BlogEngine Settings that it accommodate also hosting solutions and ignore that extra url before by some optional settings related with hosting providers and
their virtual folders or whatever mess it is?

This becomes a pain and our amazing BlogEngine Developers could help with this? Not only there is a problem with BlogEngine in some hosting providers related with BlogEngine url rewriter but also when you want to run multiple separated installation of BlogEngine
in hosting provider and when BlogEngine is in the root as a main domain it interference with the child BlogEngines..

Well, if somebody found a solution please give it to us NOW!! :-) ha ha

Not to point fingers, but this not exactly BE issue - look at
this for example.
This solution (also not BE specific) seems to make sense, although I can't confirm it works. Again, not to make an excuse - would be nice to handle big fat godaddy more gracefully, a lot of people use it, like it or not.

I believe the problem with BE is that you cannot add rewrite rules to web.config as you would any other site, without it causing a 500 error. Maybe I'm wrong. If there is a way to add custom rewrite rules to BE, please let me know.

You do can add any rewrite rules like to any new ASP.NET (3.5+?) website just like rtur above mentioned. Unfortunately I wasn't able to success with the suggestion above coz I had experienced big problem with Domain Mapping with my 123reg
Shared Hosting and any support ticket took days to response with a proper asnwer what is going on. So I don't know if the problem was with Domain Mapping or the suggestion above but after 1 month I gave up and upgraded to VPS. So far all good as I can do whatever
I want with my IIS 7.5 :-O except it costs so much $$$$$ :-O